Reich aftershock; the next economy and america’s future (2010)

ALSO BY ROBERT B REICH Supercapitalism Reason I’ll Be Short The Future of Success Locked in the Cabinet The Work of Nations The Resurgent Liberal Tales of a New America The Next American Frontier AS EDITOR The Power of Public Ideas AS COAUTHOR, WITH JOHN D DONAHUE New Deals: The Chrysler Revival and the American System THIS IS A BORZOI BOOK PUBLISHED BY ALFRED A KNOPF Copyright © 2010 by Robert B Reich All rights reserved Published in the United States by Alfred A Knopf, a division of Random House, Inc., New York, and in Canada by Random House of Canada Limited, Toronto www.aaknopf.com Knopf, Borzoi Books, and the colophon are registered trademarks of Random House, Inc Grateful acknowledgment is made to Alfred A Knopf for permission to reprint an excerpt from Beckoning Frontiers by Marriner S Eccles, copyright © 1951 by Marriner S Eccles and renewed 1979 by Sara M Eccles Reprinted by permission of Alfred A Knopf, a division of Random House, Inc Library of Congress Cataloging-in-Publication Data Reich, Robert B Aftershock : the next economy and America’s future / Robert B Reich p cm eISBN: 978-0-307-59452-5 United States—Economic conditions—2009– United States—Economic conditions—2001–2009 United States—Social conditions—21st century—Forecasting I Title HC106.84.R45 330.973—dc22 v3.1 2010 2010004134 To Ella Reich-Sharpe, and her generation Epochs of private interest breed contradictions … characterized by undercurrents of dissatisfaction, criticism, ferment, protest Segments of the population fall behind in the acquisitive race.… Problems neglected become acute, threaten to become unmanageable and demand remedy.… A detonating issue—some problem growing in magnitude and menace and beyond the market’s invisible hand to solve—at last leads to a breakthrough into a new political epoch —Arthur M Schlesinger, Jr., The Cycles of American History CONTENTS Cover Other Books by This Author Title Page Copyright Dedication Epigraph INTRODUCTION: The Pendulum PART I The Broken Bargain Chapter Eccles’s Insight Chapter Parallels Chapter The Basic Bargain Chapter How Concentrated Income at the Top Hurts the Economy Chapter Why Policymakers Obsess About the Financial Economy Instead of About the Real One Chapter The Great Prosperity: 1947–1975 Chapter How We Got Ourselves into the Same Mess Again Chapter How Americans Kept Buying Anyway: The Three Coping Mechanisms Chapter The Future Without Coping Mechanisms Chapter 10 Why China Won’t Save Us Chapter 11 No Return to Normal PART II Chapter The 2020 Election Chapter The Politics of Economics, 2010–2020 Chapter Why Can’t We Be Content with Less? Chapter The Pain of Economic Loss Chapter Adding Insult to Injury Chapter Outrage at a Rigged Game Chapter The Politics of Anger Backlash PART III The Bargain Restored Chapter What Should Be Done: A New Deal for the Middle Class Chapter How It Could Get Done Acknowledgments Notes A Note About the Author INTRODUCTION The Pendulum In September 2009, on the eve of a meeting of the twenty largest economies, Treasury Secretary Tim Geithner, assessing what had happened to the United States in the years leading up to the Great Recession, repeated the conventional view that “for too long, Americans were buying too much and saving too little.” He then went on to say that this was “no longer an option for us or for the rest of the world And already in the United States you can see the rst signs of an important transformation here as Americans save more and we borrow substantially less from the rest of the world.” He called for a “rebalanced” global economy in which Americans consume less and China consumes more Geithner was correct about the transformation But he misstated the underlying problem, of which the Great Recession was a symptom The problem was not that Americans spent beyond their means but that their means had not kept up with what the larger economy could and should have been able to provide them The American economy had been growing briskly, and America’s middle class naturally expected to share in that growth But it didn’t A larger and larger portion of the economy’s winnings had gone to people at the top This is the heart of America’s ongoing economic predicament We cannot have a sustained recovery until we address it It is also our social and political predicament We risk upheaval and reactionary politics unless we solve it The central challenge is not to rebalance the global economy so that Americans save more and borrow less from the rest of the world It is to rebalance the American economy so that its bene ts are shared more widely in America, as they were decades ago Until this transformation is made, our economy will continue to experience phantom recoveries and speculative bubbles, each more distressing than the one before We have been at this juncture before Our history swings much like a pendulum between periods during which the bene ts of economic change are concentrated in fewer hands, and periods during which the middle class shares broadly in the nation’s prosperity and grows to include many of the poor—between periods during which we see ourselves as “in it together,” and periods during which we view ourselves as being pretty much on our own Roughly speaking, the rst stage of modern American capitalism (1870–1929) was one of increasing concentration of income and wealth; the second stage (1947–1975), of more broadly shared prosperity; the third stage (1980– 2010), of increasing concentration It is vital for our future that we commence a fourth stage, in which broad-based prosperity is again the norm Our history is not quite a pendulum because we never return exactly to where we were before It is more like a spiral, in which we arrive at roughly the same points but at di erent altitudes and with somewhat di erent perspectives Yet each turn of the spiral gives rise to similar questions about the nature and purpose of an economy How much inequality can be tolerated? When bets go sour and the economy nosedives, who gets bailed out and who are left to fend for themselves? At what point does an economy imperil itself politically, as large numbers conclude that the game is rigged against them? Most fundamentally, what and whom is an economy for? Technically, the Great Recession has ended But its aftershock has only begun Economies always rebound from declines, even from the depths of the darkest downturns To this extent, the business cycle is comfortably predictable Businesses eventually must reorder when inventories grow too depleted, families have to replace cars and appliances that are beyond repair, and modern governments invariably spend what they can and make it easier to borrow money in order to stimulate job growth The larger and more interesting question is what happens next If the underlying “fundamentals” are in order—if consumers are subsequently capable of spending and saving; if businesses have good reasons to invest; if governments maintain a fair balance between public needs and scal restraint; if the global economy e ciently allocates savings around the world, and if the environment can be sustained—then we can expect healthy and stable growth But if these conditions are out of whack, economies as well as societies become imperiled I will argue here that our fundamentals are profoundly skewed, that the Great Recession was but the latest and largest outgrowth of an increasingly distorted distribution of income, and that we will have to choose, inevitably, between deepening discontent (and its ever nastier politics) and fundamental social and economic reform I believe that we simply must—and will—choose the latter The future is uncertain, of course, but indications are that the so-called recovery will be anemic A large percentage of Americans will remain jobless, or their wages will drop American consumers will not be able to spend enough to keep the recovery going Without sufficient customers, businesses will not invest enough to fuel a sustained period of growth Foreign markets, especially China, will not buy enough American exports to make up for the shortfall because they will be concerned about their own unemployment; they will have to fuel their own economies And the U.S government will not be able to run de cits large or long enough, or keep money cheap enough for a sufficient length of time, to fill the gap As a result, the economy will turn out to be weaker than it was during the phantom recovery of 2001–2007, during which consumers, having drained their savings, had money to spend only because they could borrow against the rising values of their homes —sometimes irrationally, as has been made clear by the loud burst of the housing bubble The so-called recovery before that, which lasted through most of the 1990s, was more fragile than many assumed at the time It ended when families could not work any more hours and when the “dot-com” bubble inevitably burst That legacy is with us as well The underlying problem emerged around 1980, when the American middle class started being hit by the double whammy of global competition and labor-replacing technologies But rather than strengthening safety nets, empowering labor unions, improving education and job training, and taking other measures to better adapt the American workforce, the nation turned in the opposite direction Instead of implementing a new set of policies that would enable the middle class to ourish under these very different circumstances, political leaders—reflecting the prevailing faith in an omnipotent and all-knowing free market—embraced deregulation and privatization, attacked and diminished labor unions, cut taxes on the wealthy, and shredded social safety nets The manifest result was stagnant wages for most Americans, increasing job insecurity, and steadily widening inequality The benefits of economic growth accrued to a smaller and smaller group In the late 1970s, the richest percent of the country took in less than percent of the nation’s total income After that, income concentrated in fewer and fewer hands By 2007, the richest percent took in 23.5 percent of total national income It is no mere coincidence that the last time income was this concentrated was in 1928 I not mean to suggest that such astonishing consolidatons of income at the top directly cause sharp economic declines The connection is more subtle As the economy grows, the vast majority in the middle naturally want to live better They know it’s possible because they see people at or near the top enjoying the bene ts of that growth in the form of larger homes, newer cars, more modern appliances, and all the other things money can buy Yet if most people’s wages barely rise, their aspirations to live better can be ful lled only by borrowing, and going ever more deeply into debt Their consequent spending fuels the economy and creates enough jobs for almost everyone, for a time But it cannot last Lacking enough purchasing power, the middle class cannot keep the economy going Borrowing has its limits At some point—1929 and 2008 o er ready examples—the bill comes due It is far easier for government to interpret these episodes as temporary financial crises —attributing them to excessive levels of debt, and trying to cope with them by ooding nancial institutions with enough money to maintain their solvency and avoid runs on banks—than to x the fundamental problem But as I will show, the high debt is a symptom rather than the cause of such crises Because politicians are interested rst and foremost in being reelected, they will opt for short-term xes that not overly disturb the moneyed interests on whom they have grown more dependent as the costs of campaigns have escalated The rich, for their part, defend their disproportionate affluence as a necessary consequence of their disproportionate talent and essential role The meltdown of 2008 was a window into the American economy’s underlying aws Only by dint of an extraordinary e ort—the Federal Reserve Board lowering interest rates to near zero and making it easier to borrow, and Congress and the White House bailing out Wall Street, cutting taxes, and spending hundreds of billions of dollars on order to gain passage, the White House and Democratic leaders brokered deals with Big Pharma and private health insurers, who demanded in return that any so-called reform improve their pro tability The resulting legislation does not adequately control future costs, and it will require that Americans pay more for their health insurance than they would have had the deals not been made Much the same occurred with e orts to reform the nancial system The White House and Democratic leaders could have described those e orts as means to overhaul economic institutions that bestow outsized rewards on a relative few, while imposing extraordinary costs and risks on almost everyone else Instead, they de ned the goal narrowly, as reducing risks to the nancial system created by particular practices on Wall Street The solution thereby shriveled to a set of technical xes for how the Street should conduct its business Once the worst of the nancial crisis seemed to have passed, the public basically lost interest In these respects, the Obama administration postponed the day of economic reckoning Now that middle-class coping mechanisms are exhausted, though, that postponement cannot last for long Americans need to understand what has happened, and why And they must understand the real choice ahead An aftershock in the form of another deep recession might be enough to spur reform But a slower aftershock—characterized by several years of high unemployment, languishing or declining wages, and slow growth—may not be enough to upend vested interests “that can too readily hold on to their power and increasingly anachronistic views,” as Marriner Eccles described them in the 1920s and early 1930s A slower aftershock is more likely to unleash a political backlash as, over time, more Americans grow skeptical that established institutions will respond to their needs Yet even under these circumstances, reform could still be galvanized The early stirring of backlash may be enough to convince established interests that reform is necessary in order to forestall worse repercussions Sooner or later, the chief executives of America’s largest corporations and Wall Street banks will become concerned about the lackluster economy Their rms cannot generate pro ts, year after year, if the American middle class cannot a ord to purchase the products and services these rms o er None but the most globalized American rms will be able to gain enough from foreign markets to make up for the shortfall at home The CEOs will also notice the public’s increasing anger Before, the CEOs would have been largely insulated from it The anger would not have spilled over into their gated communities, vacation retreats, o ce parks, and well-secured o ce towers But at some point in the not-too-distant future it will spill over Perhaps the CEOs will experience a growing number of troubling incidents (limousines purposefully scratched, enraged people showing up at their Park Avenue and Wall Street o ce buildings) The executives will hire more security guards to protect their offices and their homes, but this will not allay their concerns It will become apparent to many of them, as it did to Eccles after the Crash of 1929, that if they “resisted any change designed to bene t all the people, [they] could be consumed by the poisons of social lag [they] had helped create.” The CEOs will also detect a change of mood in Washington For years, these CEOs and the executives they supervise have showered politicians with contributions The contributions have proved to be good investments, generating signi cant returns in the form of lower taxes and of legislation favoring their companies Yet in the years to come the contributions will become less potent Although the Supreme Court has allowed an unlimited amount of corporate political money to in uence politics, the CEOs will discover this to be a double-edged sword Vast corporate expenditures will ignite an even greater backlash as more Americans conclude that big business and Wall Street are exerting ever growing control over politics The CEOs will note an increasing number of bills introduced to raise tariffs and reduce trade, restrict immigration, and limit global investment Any such moves could have devastating e ects on their rms’ bottom lines, as well as on their own incomes The CEOs will also have to contend with legislative proposals to prevent them from ring employees or outsourcing abroad Top executives on Wall Street will eventually confront attempts to break up their banks and narrowly constrain their investments CEOs, executives, traders, hedge-fund managers, and others with high incomes will encounter more bills to cap their earnings and their bonuses, limit their wealth, and impose confiscatory taxes If nothing is done to counter present trends, the major fault line in American politics will no longer be between Democrats and Republicans, liberals and conservatives It will be between the “establishment”—political insiders, power brokers, the heads of American business, Wall Street, and the mainstream media—and an increasingly madas-hell populace determined to “take back America” from them Eventually, the Independence Party, or its equivalent, will prevail When they understand where all this is heading, the powerful interests that have so far resisted change are likely to see that the alternative is far worse They will support reforms that lead us back to a fairer distribution of income, wealth, and opportunity But the longer they take to come around, the larger and more virulent the backlash they will have to contend with As I said at the outset of this book, a virtual pendulum underlies the American political economy We swing from eras in which the bene ts of economic growth are concentrated in fewer hands to those in which the gains are more broadly shared, and then back again We are approaching the end of one such cycle and the start of the next The Great Prosperity of 1947 to 1975 was followed by three decades of retrenchment, ending in the Great Recession The question is not whether the pendulum will swing back It surely will The question is how it will swing—whether with reforms that widen the circle of prosperity, or with demagoguery that turns America away from the rest of the world, shrinks the economy, and sets Americans against one another My bet is on the former America has an enormous reservoir of resilience and common sense Whenever we have faced a palpable crisis—a depression, an enveloping war, a profound threat to our civil liberties—we have put partisan politics and abstract ideology aside and gotten on with what needed to be done Whenever we have faced the moral urgency of living up to our ideals—to recognize the rights of blacks, women, and the disabled, for example—we have risen to the occasion None of us can thrive in a nation divided between a small number of people receiving an ever larger share of the nation’s income and wealth, and everyone else receiving a declining share The lopsidedness not only diminishes economic growth but also tears at the fabric of our society America cannot succeed if the basic bargain at the heart of our economy remains broken The most fortunate among us who have reached the pinnacles of power and success depend on a stable economic and political system That stability rests on the public’s trust that the system operates in the interest of us all Any loss of such trust threatens the well-being of everyone We will choose reform, I believe, because we are a sensible nation, and reform is the only sensible option we have ACKNOWLEDGMENTS This book is the result of discussions with people too numerous to name, although some will no doubt recognize their arguments and counterarguments in these pages Special mention should go to my former colleagues Jack Donahue and Richard Parker and current colleagues George Akerlof, Brad DeLong, Jack Glaser, David Kirp, Jane Mauldon, Harley Shaiken, Eugene Smolensky, and Laura Tyson, all of whom helped me sharpen my arguments but none of whom should bear responsibility for them Several friends subjected earlier drafts to the sort of criticism only friends can be trusted to provide Here, Doug Dworkin, John Isaacson, and Erik Tarlo played their customary roles I am also grateful to diligent students here at the Goldman School of Public Policy, especially to Mia Bird, Teal Brown, Jason Burwen, Jonathan Stein, and Renee Willette, who helped me trace down facts and focus the argument The Blum Center and the Goldman School, both at the University of California at Berkeley, provided nancial support As usual, my assistant, Rebecca Boles, was extraordinarily helpful, and Manuel Castrillo was responsive to all calls for technical assistance I want to give special thanks to my partner, Perian Flaherty, for her remarkable insight, editorial air, patience, and ever wise judgment My agent, Rafe Sagalyn, provided much needed advice, and my long-standing editor and friend, Jonathan Segal, o ered abiding encouragement, wisdom, and thoughtfulness NOTES INTRODUCTION THE PENDULUM “for too long, Americans were buying”: Timothy Geithner, “Press Briefing by Treasury Secretary Tim Geithner on the G20 Meetings,” Pittsburgh, September 24, 2009 Our history swings much like a pendulum: On this point, see Arthur M Schlesinger, Jr., The Cycles of American History (New York: Houghton Mifflin, 1986) Schlesinger defined a political-economic cycle as “a continuing shift in national involvement between public purpose and private interest” (p 27) See also Albert O Hirschman, Shifting Involvements: Private Interest and Public Action (Princeton, N.J.: Princeton University Press, 1982) the last time income was this concentrated: See Thomas Piketty and Emmanuel Saez, “The Evolution of Top Incomes: A Historical and International Perspective,” AEA Papers and Proceedings 96, no (May 2006): 200–205 The Broken Bargain PART I ECCLES’S INSIGHT “Men I respected assured me”: All quotes in this chapter are from Marriner Eccles’s memoir, Beckoning Frontiers (New York: Alfred A Knopf, 1951), pp 54, 71–81 PARALLELS The wages of the typical American: See Bureau of Economic Analysis, National Compensation Survey, “Current-Dollar Historical Listings: Employee Cost Listings Historical Index,” Tables 4–10, January 2010 a male worker earning the median male wage: See U.S Census Bureau press release, “Household Income Rises, Poverty Rate Unchanged, Number of Uninsured Down,” U.S Census Bureau, Current Population Survey data, August 26, 2008 Economists Emmanuel Saez and Thomas Piketty: See Thomas Picketty and Emmanuel Saez, “The Evolution of Top Incomes: A Historical and International Perspective,” AEA Papers and Proceedings 96, no (May 2006): 200–205 The most recent update of their data can be found in Emmanuel Saez, “Striking It Richer: The Evolution of Top Incomes in the United States,” University of California, Department of Economics, August 5, 2009 Their calculation is before paying taxes, and it includes income from capital gains Sociologists Robert S Lynd and his wife: See Robert S Lynd and Helen Merrell Lynd, Middletown (New York: Harcourt Brace, 1929), pp 21–24 Savings had averaged 9–10 percent of after-tax income: See Bureau of Economic Analysis, National Income and Product Accounts Table, “Personal Income and Its Distribution,” last updated January 29, 2010 (http://www.bea.gov/national/nipaweb/ TableView.asp?SelectedTable=58&ViewSeries=NO&Java=no& Request3Place=N&3Place=N&FromView=YES&Freq=Year &FirstYear=1943&LastYear=2009&3Place=N &Update=Update&JavaBox=no#Mid) Total mortgage debt was almost three times higher: See ibid The Dow Jones Industrial Average: See Dow Jones Industrial Average Historical Charts, daily, Thomson Reuters and IDC/ComStock (http://stockcharts.com/charts/historical/djia19201940.html) Four years later: See Stock Exchange Practices, Hearings, April–June 1932, Part 2, pp 566–67 Meanwhile, National City Bank: See Federal Deposit Insurance Corporation, “Learning Bank” http://www.fdic.gov/about/learn/learning/when/1930s.html THE BASIC BARGAIN On January 5, 1914, Henry Ford: See A Rees, National Bureau of Economic Research, Real Wages in Manufacturing 1890 to 1914, Chapter 5, “Real Wages,” 1961 (http://www.nber.org/books/rees61-1) Ford was … a smart capitalist: See A Nevins and F Ernest Hill, Ford: The Times, the Man, the Company (New York: Scribners, 1954) By the first decades of the twentieth century: See Damon Silvers, “How a Low Wage Economy with Weak Labor Laws Brought Us the Mortgage Credit Crisis,” lecture presented by The Berkeley Journal of Employment and Labor Law, Institute of Research on Labor and Employment, University of California, Berkeley, April 2, 2008 (http://www.irle.berkeley.edu/events/spring08/feller/) British economist John Maynard Keynes: These and subsequent quotes from John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt Brace, 1936), pp 373–74 “Liquidate labor, liquidate stocks”: See Herbert Hoover, The Memoirs of Herbert Hoover, vol 3: The Great Depression 1929–1941 (New York: Macmillan, 1952) HOW CONCENTRATED INCOME AT THE TOP HURTS THE ECONOMY The richest man in the world: See “Richest in the World, 2008,” Forbes magazine (http://www.forbes.com/lists/2008/10/billionaires08_Warren-Buffett_C0R3.html) in the same gray stucco house: See Roger Lowenstein, Buffett: The Making of an American Capitalist (New York: Broadway Books, 1995), pp 8–10 “If I wanted to,” Buffet once said: See Janet Lowe, Warren Buffett Speaks: Wit and Wisdom from the World’s Greatest Investor (New York: John Wiley & Sons, 1997), pp 165–66 the nearly $100 million Kenneth Lewis earned: See Securities and Exchange Commission Filings compiled by Forbes magazine, CEO Compensation Reports (sources: Bank of America SEC Filings; FT Interactive Data; and LionShares via FactSet Research Systems) In the year prior to Lehman Brothers’: See ibid Taxing the wealthy to help the poor: See Jeremy Bentham, “Critique of the Doctrine of Inalienable, Natural Rights,” in Anarchical Fallacies, vol of The Works of Jeremy Bentham, ed John Bowring (Edinburgh: William Tait, 1843) the top 10 percent took home: See analysis by Lawrence Mishel, Jared Bernstein, and Heidi Shierholz, The State of Working America, 2008/2009, Chapter 5, Table 2.4, “Shares of Total Income (Before and After Tax) and Income Tax for Percentile Groups” (Washington, D.C.: Economic Policy Institute, 2010) “much lower stakes will serve”: John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1961), p 374 WHY POLICYMAKERS OBSESS ABOUT THE FINANCIAL ECONOMY INSTEAD OF ABOUT THE REAL ONE “Without this rescue plan”: See “White House Written Statement of President George W Bush,” September 28, 2009 (http://thepage.time.com/statement-by-president-bush/) “If we not this”: Senator Judd Gregg to the Associated Press, September 28, 2008 The relative calm of preceding decades: The theoretical underpinnings of this occurrence had been developed by economist Hyman Minsky See Hyman Minsky, Stabilizing an Unstable Economy (New York: McGraw-Hill, 2008) THE GREAT PROSPERITY: 1947–1975 During this quarter century: See U.S Census Bureau, Current Population Reports, Measuring 50 Years of Economic Change Using the March Current Population Survey (U.S Government Printing Office, Washington, D.C., 1998), pp 7–8 Labor productivity: U.S Bureau of Labor Statistics, Historical SIC Industry Labor and Cost Indexes, 1947–1977 Expressed in 2007 dollars: See U.S Bureau of Labor Statistics Series Reports, “Family, All Races by Median and Mean Income: 1947 to 2006,” Table F-7 (http://www.census.gov/hhes/www/income/histinc/f07ar.html) By the end of the war: See Budget of the United States Government, Historical Tables, Federal Debt, Table 7.1 —Federal Debt at the End of Year: 1940–2013, Executive Office of the President, December 2008 “All alike expect and fear”: Alvin Hansen, Economic Problems of the Post War World: Democratic Planning for Full Employment, National Council for the Social Studies, 1942 By the mid-1950s: See “Union Members Summary,” U.S Bureau of Labor Statistics economic news release, January 2010 (http://www.bls.gov/news.release/union2.nro.htm) “Unless we get a more realistic distribution”: See Nelson Lichtenstein, Walter Reuther: The Most Dangerous Man in Detroit (New York: Basic Books, 1995), p 231 A college sociology textbook of 1956: See Joseph Kahl, The American Class Structure (New York: Holt, Rinehart, 1956), pp 109–10 The interstate highway system: See Richard Weingroff, The Greatest Decade: 1956 to 1966, Federal Highway Commission Report, December 22, 2008 10 The expansion of public universities: See U.S Census Bureau, Current Population Survey, Annual Social and Economic Supplements, “Type of Family, All Races by Median and Mean Income: 1947 to 2006” (http://www.census.gov/hhes/www/income/histinc/f07ar.html) 11 The federal government, especially the Defense Department: See U.S Department of Education, National Center for Education Statistics, Digest of Education Statistics, 2008 (NCES 2009–020), Chapter 3, 2009 12 The Pentagon also gave birth: See M H Weik, “The ENIAC Story,” Ordinance Ballistic Research Laboratories, 1961 13 New fighter jets and engines morphed: See Boeing Airlines, “Commercial Airplanes: Military Derivatives,” Boeing Airlines External Communications Commercial Airline Division (http://www.boeing.com/commercial/707family/deriv.html) 14 “The old imperialism”: Inaugural address of President Harry S Truman, January 20, 1949 15 In the 1950s, under President Dwight Eisenhower: See Internal Revenue Service, Statistics of Income, Individual Statistical Tables by Tax Rate and Income Percentile 16 “a better, richer, and happier life”: James Truslow Adams, The Epic of America (Boston: Little, Brown, 1931), p 73 HOW WE GOT OURSELVES INTO THE SAME MESS AGAIN By the late 1990s: See U.S Census Bureau, “Historical Trends in Income Inequality—Middle Class,” Table H-3, “Historical Income Tables by Quintile.” the median wage flattened: See U.S Census Bureau, “Historical Trends in Income Inequality—Middle Class,” Table H-3 It shredded safety nets: See U.S Department of Labor, Workforce Security Data Tables, “Unemployment Insurance Data Tables: 1st Quarter–4th Quarter, 2007,” Division of Actuarial Resources, Office of Income Support, January 7, 2010 by 2010, fewer than percent: See U.S Bureau of Labor Statistics economic news release, “Union Members Summary— 2009,” January 22, 2010 And nothing impeded CEO salaries: See Lawrence Mishel, “Executive Pay,” in The State of Working America (Washington, D.C.: Economic Policy Institute, 2008), pp 220–24 More than half of all the money: See Lawrence Bebchuk, “The Growth of Executive Pay,” Oxford Review of Economic Policy 21, no (2005): 283–303 By 2007, financial and insurance companies: See Bureau of Economic Analysis, National Income and Product Accounts (NIPA) Tables, Section I: Domestic Product and Incomes, “Real Gross Value Added by Industry,” 2009 In 2009, the twenty-five best-paid hedge-fund managers: See AR: Absolute Return + Alpha, annual survey, 2009 in 2007, Ford’s financial division: Securities and Exchange Commission Filings 10 according to presidential candidate Ronald Reagan: Ronald Reagan campaign address, “A Vital Economy: Jobs, Growth, and Progress for Americans,” October 24, 1980 11 Moreover, they had no clear memory: See Technology Triumphs, Morality Falters, Section 5: “America’s Collective Memory,” the Pew Research Center for the People and the Press, January 3, 1999 HOW AMERICANS KEPT BUYING ANYWAY: THE THREE COPING MECHANISMS Coping mechanism #1: See U.S Department of Labor Women’s Bureau, “Labor Force Participation of Women and Mothers,” Historical Data Tables, October 9, 2009 (http://www.bls.gov/opub/ted/2009/ted_20091009.htm) Coping mechanism #2: See U.S Bureau of Labor Statistics, 2008 American Time Use Survey, “Working and Work Related Activities Tables,” 2008 (http://www.bls.gov/tus/current/work.htm) Coping mechanism #3: See Bureau of Economic Analysis, National Income and Product Accounts Table 2.1, “Personal Income and Its Distribution,” January 29, 2010 (http://www.bea.gov/national/nipaweb/TableView.asp? SelectedTable=58&Freq=Qtr&FirstYear=2007&LastYear=2009) in 1980 the average home: See U.S Census Bureau, “Median and Average Home Sales Prices, Annual Historical Data,” December 2, 2004 THE FUTURE WITHOUT COPING MECHANISMS In 2009, some 50 million workers: See A Munnell, J P Aubrey, and D Muldoon, The Financial Crisis and Private Defined Benefit Plans, Center for Retirement Research at Boston College, November 8, 2008 “should have enough spending power”: See Bank of America Merrill Lynch, The Myth of the Overleveraged Consumer, August 14, 2009 10 WHY CHINA WON’T SAVE US “We cannot go back”: Barack Obama, “G-20 Summit in Pittsburgh: Obama’s First UN Address, HIV Vaccine in the Works,” transcript provided by CNN, September 24, 2009 By 2009, China was second only to the United States: See Bank of America Merrill Lynch, US Economics Weekly, Merrill Lynch Global Research, Products and Reports, October 2009 But the benefits of China’s growth: See Barry Ritholtz, “China Consumer Spending vs Saving,” May 8, 2009 (http://www.ritholtz.com/blog/2009/05/china-consumer-spending-vs-savings/) Data sources: Bank of America Merrill Lynch, “United States Economics, 2009.” In 2009, other American firms: See General Motors, Evergreen Solar, and General Electric press releases, 2008 to 2010 Backlash PART II THE POLITICS OF ECONOMICS, 2010–2020 Just before the Great Recession: See Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 1.5.5: Gross Domestic Product, Expanded Detail Last revised: January 29, 2010 Personal consumption did not always constitute 70 percent: See Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 1.5.5 WHY CAN’T WE BE CONTENT WITH LESS? “Many of the so-called comforts of life”: Henry David Thoreau, Walden; or, Life in the Woods (Boston: Ticknor and Fields, 1854), p 15 “The people of this country need”: John S Ellsworth, Jr., “The Depression Generation,” The North American Review 234 (October 1932) University of Michigan researcher Ronald Inglehart: See Ronald Inglehart, Christian Welzel, and Roberto Foa, World Values Survey: Happiness Trends in 24 Countries, 1946–2006, January 2008 In 1943, behavioral scientist Abraham Maslow: The original article appeared in Psychological Review 50, no (1943): 370–96 See also Janet Simons, Donald Irwin, and Beverly Drinnien, Psychology: The Search for Understanding (New York: West Publishing Company, 1987) Before the Great Recession: See press release: Annals of Internal Medicine, University of Chicago Medical School Press, December 6, 2004 In 2007, Americans spent a whopping $23.9 billion: J LaRosa, “U.S Sleep Aids Market Now Worth $23 Billion as Americans Battle Insomnia, Sleep Disorders,” Marketdata Enterprises press release, June 2008 In mid-2009, the Archives of General Psychiatry: See Mark Olfson and Steven C Marcus, “National Patterns in Antidepressant Medication Treatment,” Archives of General Psychiatry, 66, no (August 2009): 848–56 “through the whole of his life”: Adam Smith, Theory of Moral Sentiments (London: A Millar Publishing, 1790), pp 261– 63 Almost 10 percent fewer people were killed: See National Highway Traffic Safety Administration Fatality Analysis Reporting System Encyclopedia (http://www-fars.nhtsa.dot.gov/Main/index.aspx) 10 deaths and serious injuries dropped: See U.S Bureau of Labor Statistics, economic news release: “Workplace Injury and Illness Summary,” October 29, 2009 THE PAIN OF ECONOMIC LOSS Princeton psychologist Daniel Kahneman: See D Kahneman, J L Knetch, and R H Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives, 5, no (Winter 1991): 193–206 Societies whose living standards drop: Ibid Behavioral economist Christopher Ruhm: See C J Ruhm, Are Recessions Good for Your Health?, National Bureau of Economic Research, March 2006 The stock market crash of 1929: See Leonardo Tondo and Ross J Baldessarini, Suicides: Causes and Clinical Management, Medscape Medical News (http://cme.medscape.com/viewarticle/413195_2) “the crisis quality of a serious illness”: Robert S Lynd and Helen Merrell Lynd, Middletown in Transition: A Study in Cultural Conflicts (New York: Harcourt Brace, 1937), p 489 ADDING INSULT TO INJURY The median pay of CEOs: See American Federation of Labor and Congress of Industrial Organizations, Executive Paywatch Database, “CEO Pay Rates,” 2008 According to The New York Times: See Graham Bowley, “Strong Year for Goldman as It Trims Bonus Pool,” New York Times, January 21, 2010 “In a poor society a man proves”: See R Layard, “Human Satisfactions and Public Policy,” Economic Journal 90, no 360 (December 1980): 737–50 Adam Smith defined necessities: See Adam Smith, An Enquiry into the Nature and Causes of Wealth and Nations (London: Methuen, 1776), Book 5, Chapter In 1899, the economist-sociologist Thorstein Veblen: Thorstein Veblen, The Theory of the Leisure Class (New York: Macmillan, 1899) See Ken McCormick, “Veblen and Duesenberry: The Demonstration Effect Revisited,” Journal of Economic Issues 17, no (December 1983): 1125–29 More than a half century later: James Duesenberry, Income, Saving and the Theory of Consumer Behavior, Harvard Economic Studies, 1967 For a highly pertinent and thoughtful treatment of this subject, see Robert H Frank, Falling Behind: How Rising Inequality Harms the Middle Class (Berkeley: University of California Press, 2007) “Wealth … is any income at least $100 more a year”: H L Mencken, A Book of Burlesques, (New York: Alfred A Knopf, 1916), p 310 the typical new home built in the United States in 2007: See Gopal Ahluwahlia, National Association of Home Builders: Consumer Preferences, February 14, 2008 The Daily Beast reported that Kathleen Fuld: See “What the Rich Don’t Want You to Know About the Way They Spend Their Money,” Daily Beast, December 5, 2008 10 Prestigious universities have only a limited number: Pell Grants, available only to students whose families are relatively poor, offer one measure In 2006 (the most recent year for which data is available), just one in ten Harvard students received a Pell Grant Other of America’s elite universities have similar percentages See http://www.jbhe.com/features/57_pellgrants.html By way of comparison, at most campuses of the University of California, a public institution, approximately 30 percent of students are eligible for Pell Grants 11 economists Roberto Perotti and Alberto Alesina have found: A Alesina and R Perotti, “Income Distribution, Political Instability, and Investment,” European Economic Review 40 (June, 1996): 1202–29 OUTRAGE AT A RIGGED GAME But when the San Francisco Chronicle reported: Nanette Asimov, “Execs Still Get Raises as UC Cuts Staffing Pay,” San Francisco Chronicle, August 7, 2009 in a poll taken by Hart Associates: Hart Associates poll of 802 voters taken September 21–23, 2009, http://epi.3cdn.net/e5566d3b8ac34f6079_yym6bxts7.pdf) The inspector general concluded: “Factors Affecting Efforts to Limit Payments to AIG Counterparties,” Office of the Special Inspector General for the Troubled Asset Relief Program, November 17, 2009 (http://www.sigtarp.gov/reports/audit/2009/Factors_Affecting_Efforts _to_Limit_Payments_to_AIG_Counterparties.pdf) “If banks had cut mortgage rates”: Peter Eavis, “U.S Aids Benefits Banks, Not Homeowners,” Wall Street Journal, January 19, 2010 During the 2008 elections: Data on lobbying expenditures and campaign contributions are available at the industryspecific level from OpenSecrets.org The data for “Finance/Insurance/Real Estate,” for example, is available at http://www.opensecrets.org/industries/indus.php?ind=F According to the Center for Public Integrity: “More Than 2,000 Spin Through Revolving Door,” LobbyWatch, Center for Public Integrity, May 2, 2006 (http://projects.publicintegrity.org/lobby/report.aspx?aid=678) When Dick Gephardt ran for president in 1988: Sebastian Jones, “Dick Gephardt’s Spectacular Sellout,” The Nation, September 30, 2009 (http://www.thenation.com/doc/20091019/jones) Between 2012 and 2021: “The Estate Tax: Myths and Realities,” Center on Budget and Policy Priorities, February 23, 2009 (http://www.cbpp.org/files/estatetaxmyths.pdf) THE POLITICS OF ANGER One, nicknamed “Jackpot Jimmy”: James Barron and Russ Buettner, “Scorn Trails A.I.G Executives, Even in Their Driveways,” New York Times, March 19, 2009 In a poll taken in December 2009: “U.S Seen as Less Important, China as More Powerful,” Survey Reports, Pew Research Center for the People and the Press, December 3, 2009 Tom Tancredo, a former congressman: Adam Nagourney, “Conservatives Get a Look at Possible Candidates, New York Times, February 20, 2010 Governor Tim Pawlenty: Quoted in “Scenes from a Counter-Revolution,” The Economist, February 13, 2010, p 31 “get rid of the power people”: Kate Zernike, “Paul Vows to Remain True to the Tea Party,” New York Times, May 18, 2010 when asked by Fox News: Quoted by Scott Lehigh, “How Is Brown Doing?” Boston Globe, February 24, 2010 “The wizards in Washington”: Chuck Baldwin, “Anger with Government Not Enough,” Independent Political Report, December 18, 2009 (http://www.independentpoliticalreport.com/2009/12/chuck-baldwin-anger-with-federalgovernment-not-enough/) It was the bailout of Wall Street: Quoted in Gerald Seib, “No Seat for Wall Street at Tea Party, Wall Street Journal, January 12, 2010 Historian Richard Hofstadter: Richard Hofstadter, “The Paranoid Style in American Politics,” Harper’s Magazine, November 1964, pp 77–86 10 Father Charles Coughlin of Detroit: A collection of Father Coughlin’s speeches, including the one quoted here, can be found on the Social Security Administration’s Web site: http://www.ssa.gov/history/fcspeech.html 11 Senator Huey “the Kingfish” Long of Louisiana: Information about Huey Long and his populist politics is also available on the Social Security Administration’s Web site: http://www.ssa.gov/history/hlong1.html 12 A classic sociological study of thirty-five dictatorships: J O Hertzler, “Crises and Dictatorships,” American Sociological Review (1940): 157–69 The Bargain Restored PART III WHAT SHOULD BE DONE: A NEW DEAL FOR THE MIDDLE CLASS The yearly cost to the federal government: This sum is calculated by multiplying Census data on the number of people in each income category (